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Resisting Automatic Savings
The automatic enrollment of new employees into a company’s 401k pension plan has gone from a niche policy to the mainstream in just a few years. Today, a majority of Fortune 500 companies have automatic enrollment, as do some 21% of all companies that offer defined-contribution pension plans. Employers like their workers to participate in their 401k plans not because of some altruistic desire that their workers have adequate retirement savings, but rather because workers in 401k plans (especially those who are receiving an employer’s matching contribution that may not vest for a period of time) are more likely to stick around, making it more profitable for companies to invest in training them. But the idea of automatic enrollment has been around for a decade: Why should it take so much time for companies to adopt such a policy? One suggestion is that auto enrollment pushes up the cost of offering 401k plans, since more people participate and they have higher contribution levels, increasing the costs to employers. The higher potential cost of providing 401ks with automatic enrollment has led some economists to ask whether employers compensate for higher costs by lowering compensation elsewhere — perhaps by offering less generous health insurance, slightly lower wages, or reducing some other fringe benefits. If that is the case, then the companies that have yet to implement automatic enrollment may be hesitant to do so because of the costs. Research shows that doesn’t seem to be occurring, however. A recent paper by Barbara Butrica and Nadia Karemcheva of the Urban Institute examines data to see if firms that automatically enroll new employees into their 401k plan reduce other forms of compensation. The researchers did not detect this is the case, except they did find a slight reduction in the match rate. Butrica and Karemcheva also find that companies that implement automatic enrollment generally have higher compensation levels and a greater proportion of compensation in the form of fringe benefits. This suggests that companies that employ a significant number of skilled, highly educated workers are disproportionately likely to use automatic enrollment. For these companies it represents another tool to increase tenure. Since nearly every new employee is immediately enrolled in the company’s pension plan, nearly everyone has something to lose if they leave the company before the employer’s matching contributions vest. But there may be something else at work as well. A paper published by a group of West Coast academics suggests that there may still be informational lags across the country when it comes to implementing new ideas. In one striking example, the authors note that there is a significant difference between the East Coast and the Midwest when it comes to the adoption of the most recent best practices for treating a heart attack. For example, while nearly every hospital or first responder in New York makes it a practice to administer an aspirin to anyone suspected of having a heart attack, the practice is still not terribly common in Iowa. What’s more, the geographic adoption rates of best practices in medicine happens to hew closely to the geographic adoption rates of hybrid seeds in the agriculture industry a half-century ago. This suggests that some cultural component that may be contributing to the slow adoption of technology. After the release of the book “Moneyball,” Richard Thaler and Cass Sunstein wrote a review in The New Republic pointing out that the book represents a condemnation of the notion of American capitalism as being savagely competitive. After all, they reasoned, if most of the businesses in an industry where success and failure — as well as each worker’s productivity — can be precisely measured could not bother to follow the lead of the one entity (in this case, the Oakland A’s) that found new ways to excel, then what hope was there that the rest of America’s businesses would be diligent in doing everything possible to make money for their stockholders? Big companies want to keep workers: Automatic enrollment helps to do this. And they find it a good enough investment that they don’t need to reduce compensation costs elsewhere. This leads to the money question: What does the fact that smaller companies haven’t adopted auto enrollment at nearly the pace as big companies mean? Does this fact suggest that the retention of human capital isn’t as important to them? That implementing automatic enrollment can be costly and complicated, perhaps prohibitively so? Or that an idea that could potentially make them money just hasn’t really caught on yet? Regardless of the cause, that gap is a tad distressing.